General Motors and Peugeot form alliance

Brands to share cars and components, Chrysler trying to cut in on the deal.

General Motors and Peugeot form alliance

29 February 2012Joshua Dowling

The world’s biggest car maker, North America’s General Motors, has secured a 7 per cent stake in the family-owned French company Peugeot – in a deal described by at least one leading analyst as “a marriage of two weak sisters from Germany and France”.

And, in a bizarre twist, fellow intercontinental car maker, Chrysler-Fiat, which has been trying to form its own alliance with the French manufacturer since 2009, may try to cut-in on the new deal.

Both GM and Peugeot-Citroen are making massive losses in Europe, with too many factories building too few cars.

While GM made a $US1.5 billion profit in North America in the fourth quarter of 2011, it lost $US747 million in Europe for the year. Peugeot reported a loss of €497m and burned through €1.6bn of cash.

The new deal is said to bring $2 billion of savings to both brands within five years and give them $125 billion worth of buying power annually.

The alliance makes GM the biggest shareholder in Peugeot behind the Peugeot family. The current chairman, Thierry Peugeot, is the great-grandson of Eugene, who jointly led the company with his cousin Armand when it produced its first automobile in 1891.

The GM-Peugeot alliance is said to put pressure on both brands to merge or shutdown some of their manufacturing operations. However whether they will be allowed to do this is still unclear.

During the global financial crisis, GM received a €1.5 billion loan from the German government to secure the future of its German-based European brand Opel – on the condition it does not cut jobs or close factories until after 2014.

Meanwhile, Peugeot received a loan for €3 billion from the French government with the same proviso.

The bulk of Peugeot’s factories are in France and southern and central Europe, while GM Opel factories are in Germany and northern Europe.

What the merger will see is the creation of a number of small and medium-sized cars and “soft-roaders” that share parts that customers cannot see.

So the underbody, engines, suspension, and electrical systems such as air-conditioning and other control units will likely be common, but the interior and exterior appearance of the vehicles will look dramatically different from each other – even though they may be built on the same production line.

In other words, there won’t be a breadstick holder in the next Holden Commodore.

A statement from both parties overnight said each company will “continue to market and sell its vehicles independently and on a competitive basis”.

Philippe Varin, chairman of the managing board of PSA Peugeot-Citroën, said in the statement: “With the strong support of our historical shareholder [the Peugeot family] and the arrival of a new and prestigious shareholder [General Motors], the whole group is mobilized to reap the full benefit of this agreement.”

As a result of the alliance, Peugeot is expected to raise approximately €1 billion in capital, underwritten by a syndicate of banks and including an investment from the Peugeot Family Group.

In addition to the extra buying power, GM-Peugeot is expected to make savings in logistics and transportation.

For example, GM intends to do a deal with Gefco, a transport company and subsidiary of Peugeot, which will transport cars for GM in western Europe and Russia.

Automotive industry analysts in Europe and North America have had mixed reactions to the alliance.

The Economist called the move “a small step in the right direction”.

The chief automotive reporter for the Detroit News, Daniel Howes, said: “It’s less clear how a GM-Peugeot tie-up, akin to a marriage of two weak sisters from Germany and France, respectively, could benefit either company in Europe.

“Nor is it clear how combining forces could boost margins, reduce complexity or culminate in reduction of the excess production capacity weighing on the industry and its thinning profit margins.”

The Detroit News also reported overnight that Citi Investment Research analyst Itay Michaeli, in a note to investors, said: “Both companies suffer from European overcapacity and would stand to gain from obtaining purchasing and engineering savings, with technology sharing and regional expansions also offering future opportunities.

“But we've seen several auto alliances before, and many turn out mixed at best. The million dollar question is whether an alliance addresses Europe's overcapacity problem.”Peugeot is projected to use just 62 percent of its European capacity this year, compared with 74 percent at GM’s Opel.

Meanwhile, the CEO of the Chrysler-Fiat group, Sergio Marchionne, is reportedly interested in reviving talks with Peugeot to form an alliance of his own. Chrysler-Fiat lost €500 million in Europe last year.

Three years ago, at the 2009 Geneva motor show, Marchionne was working the room trying to secure a deal to acquire GM's Opel division as well as Chrysler. In the end he got Chrysler when GM decided not to sell Opel after getting a loan from the German government.

The Detroit News, quoting a Chrysler-Fiat source, reported that Peugeot “solves a whole lot of problems internationally and otherwise”.

Fiat and Peugeot already build vans together. But another joint venture would give Chrysler-Fiat access to an existing Peugeot-Mitsubishi factory near Moscow, where Marchionne could build Jeeps.

Sharing vehicles and components has become standard practice in the industry over the past decade as car makers look to cut costs by sharing the investment in new models.

Until now, joint ventures between rival car makers have typically involved trade vehicles such as vans, which have low profit margins and are bought on price rather than emotion.

The first passenger car to come from the new GM-Peugeot alliance is due in showroom by 2016, the companies said.